In my (too many) years covering the global economy and assorted financial crises, the perpetual hypocrisy exhibited by the world’s private bankers continues to amaze me. Confronted by government attempts to better regulate or in any way curtail their often irresponsible tactics to line their own pockets, bankers claim amid horrified gasps that overbearing bureaucrats are assaulting the West’s cherished free-market principles. But the moment things go a bit wonky, these same bankers are perfectly happy to accept a taxpayer handout or yelp for another slathering of easy money from the Federal Reserve or European Central Bank. Government action seems just fine with the world of Wall Street when it produces easy money for easy profits.
In recent weeks, those calls for central-bank rescues have gotten louder. The moment the recovery in the U.S. seemed to soften, traders and bankers immediately turned their eyes to Ben Bernanke, looking for another stimulating boost from the Federal Reserve. He is even getting pressure to put out from within his own ranks. The president of the Federal Reserve Bank of Boston told the Wall Street Journal that he favors another big bond-buying program (known as quantitative easing) to stimulate the economy. You can practically see the drool running down bankers’ chins at the prospect of another Fed injection of megacash that would fuel another surge in stock prices. Meanwhile, in Europe, investors looked to ECB president “Super” Mario Draghi to step in with another minibailout to keep the monetary union afloat as borrowing costs for Spain and Italy soared. Anticipation is still high that Europe’s central bank will use its power to create euros to buy up bonds that the private sector won’t.
The time has come, however, for the global financial sector to wean itself off central-bank support. We can’t expect our central banks to buy our way out of the continued problems facing the global economy. In fact, doing so might be causing more harm than good.
Nowhere is that more true than in the U.S. After years of near zero Fed interest rates and massive bouts of quantitative easing, it is hard for me to imagine that a lack of available cash is behind the stumbles of the American economy. The fact is that Fed largesse cannot resolve what really ails America. The cleanup of the nation’s housing bust is — as expected — taking years; so is the much needed but painful deleveraging of the American consumer. And Fed action can’t replace a reasoned, bipartisan effort to avoid the fiscal cliff, reform the tax code and rebuild U.S. infrastructure to improve the nation’s financial standing and boost American competitiveness.
In Europe, we can make the argument that a bit more easing and inflation would do a region mired in recession and debt some good. But does anyone really believe the ECB can truly quell the crisis? ECB cash can’t replace real reform in the countries themselves, either to fix their shattered national finances or loosen shackles on growth. The euro zone has to restore the confidence of private capital in the monetary union through fundamental change such as a stronger fiscal union and a zonewide strategy to improve growth prospects. At best, any ECB action would provide a temporary bandage on the euro zone’s hemorrhaging. Even if the ECB bought more bonds, John Higgins at research firm Capital Economics explained in a July 27 analysis, “we doubt very much it marks a watershed in the crisis.”
The fiscal problems of Spain and Italy are likely to necessitate full-blown sovereign bail-outs. Not only is the required size of these operations far in excess of what the ECB would probably be prepared to commit to bond purchases, but the Bank itself remains ideologically opposed to monetary financing of sovereign debt … Meanwhile, the crisis in the euro-zone is as much about growth as it is about debt. Buying sovereign bonds does nothing to address the fundamental problem of a lack of competitiveness that plagues troubled euro-zone countries.
Let’s take this analysis a step further. When the ECB has stepped in over the past year, either to buy bonds to push down borrowing costs, or to ease a credit crunch in Europe’s banking sector, it created false hope that the euro crisis was being resolved. That’s because the ECB bought time for government officials that they then squandered. In other words, the ECB has helped the governments of the euro zone continue to dawdle in taking the kind of strong action that could really solve the crisis. Draghi has been something of a crutch, allowing the euro zone to limp along through the crisis without taking the painful medicine it needs to get well. No wonder Draghi, in a press conference last week, stated that the ECB would step in to help euro-zone governments only after they helped themselves:
The first thing is that governments have to go to the EFSF [the euro-zone bailout fund], because, as I said several times, the ECB cannot replace governments, or cannot replace the action that other institutions have to take on the fiscal side.
We can take a similar view of what’s happening with the financial sector. Despite all the support offered by the Fed, the Bank of England and other major central banks, many of the world’s financial institutions don’t seem to have really reformed themselves, to make their operations less risky or more sustainable. The interest-rate-fixing scandal at Barclays and the massive trading loss at JPMorgan show that a fair share of the world’s big bankers are still as willing to cheat and as unwilling to control risk as they were before the 2008 Lehman Brothers meltdown. That means the global financial sector is still an unreformed threat to the stability of the global economy. Why dole out even more?
The problem isn’t restricted to the developed world. In China, financial experts are calling on the central bank to lower interest rates and loosen money to prop up sagging growth. In doing so, however, they’re asking China’s central bankers to prop up an out-of-date economic model addicted to debt and easy money. By adding more cash for the system to burn, the central bank, if too aggressive, could push the country closer to a crisis. What China needs, just like the U.S. and Europe, is real reform to spur new areas of growth rather than injections of money that would stimulate the old ones only temporarily.
To their credit, Bernanke and Draghi have so far withstood the pressure to act. Good for them. It’s high time they keep the cash spigot closed and force the global economy to undergo the reform it so badly needs. Bankers may yell and scream. But like any spoiled child, or drug addict, they’ll survive, and be better for it.